The IRS issued Notice 2014-39 this week clarifying the effect of sequestration on section 1603 grant awards. Section 1603 of the Internal Revenue Code provides a cash grant of 30 percent of the eligible basis of specified energy property.
The purpose of the Section 1603 Program, created by the American Recovery and Reinvestment Act of 2009, is to monetize renewable energy tax credits in order to attract investors in the wake of the financial crisis. To date, the Section 1603 Program has been extremely successful increasing overall renewable generation capacity while spurring tens of thousands of jobs and billions in private sector investment nationwide.
Unfortunately, the Section 1603 Program has been negatively impacted by the sequester’s across-the-board automatic spending cuts. As a result, grant applicants have seen the amount of their grant awards reduced by 8.7 percent for awards granted between March 1, 2013 and September 30, 2013, and 7.2 percent for awards granted between October 1, 2013 and September 30, 2014, irrespective of when the grant application was submitted to Treasury. This percentage will be recalculated again at the beginning of the government’s new fiscal year, and is anticipated to change only slightly for the period between October 1, 2014 to September 30, 2015 based on overall budget deficit projections.
Notice 2014-39 provides some additional clarification with respect to section 1603 cash grants:
• Taxpayers are not permitted to make up the difference for the sequestration haircut by partitioning the basis of their property and claiming the section 48 investment tax credit (ITC) or the section 45 production tax credit (PTC) on the sequestered portion of the grant award.
• Taxpayers that receive a grant award reduce their basis in the energy property by 50 percent of the amount of the actual grant awarded, and not by 50 percent of the pre-sequester cash grant.
Importantly, we note that the sequester does not impact nonrefundable tax credits. Therefore, investors with sufficient tax liabilities (or investors willing to carry credits forward to future years) that already submitted a grant application should consider whether it is more advantageous to withdraw their application and instead take advantage of the 30 percent ITC rather than the section 1603 cash grant (as currently reduced by 7.2 percent).